GIFT project hits taxation hurdle

The operationalisation of the Gujarat International Finance Tec-City (GIFT), India's first international financial services centre (IFSC), will have to wait till FY17 as the finance ministry is trying to solve a maze of taxation issues.

The operationalisation of the Gujarat International Finance Tec-City (GIFT), India’s first international financial services centre (IFSC), will have to wait till FY17 as the finance ministry is trying to solve a maze of taxation issues.

The objective of setting up of these economic zones is to compete with offshore financial centres such as Singapore and Dubai to corner a share of global financial services. After languishing for years, finance minister Arun Jaitley gave life to the proposal to set up IFSCs in India in the Budget in February. Since then, the financial sector regulators — RBI, Sebi and IRDA — have issued relaxed guidelines for setting up of units in IFSCs.

The finance ministry is yet to announce a taxation regime, which analysts say would have to be modest like in Singapore or Dubai, to be able to attract international capital.

Singapore levies 10% income tax while Dubai does not tax profits generated by units in their international financial centres. These centres don’t levy taxes on financial transactions.

However, under India’s Income Tax Act, units in IFSCs would be subjected to 18.5% minimum alternate tax (MAT) on book profits. They would also be subjected to a host of transaction taxes such as capital gains tax (15-40%), securities transaction tax (0.1%), commodities transaction tax (0.01%) and withholding taxes (5-25%).The department of economic affairs is in favour of the removal of transaction taxes and lowering of income tax rate for IFSCs to compete with global offshore financial centres.

But no consensus has emerged so far.

The department of revenue is not in favour of giving too much tax concessions, which might result in flight of existing business to IFSCs because of tax arbitrage.

Given the extent of offshore fund-raising by Indian corporates, IFSCs could emerge as a hub of foreign currency loan syndication. Similarly, the finance SEZ could help the country lure back large-scale rupee and equity derivatives trading taking place in centres like Singapore and Dubai. According to a concept paper on finance SEZs prepared by the National Institute of Public Finance and Policy, global activity on rupee derivatives is estimated at $70 billion per day. It said Indian firms are losing R2 lakh crore in revenues per year due to the shift of rupee derivatives trading to locations outside India. A substantial part of this trading can be captured by Indian firms, if appropriate regulatory and tax regime exists, it said.

While taxation is the biggest issue that needs to be resolved, other issues such as micro-prudential regulations and a carve out under Foreign Exchange Management Act (FEMA) are other key requirements that need to be addressed. While financial product transactions would be in foreign currencies in IFSCs, certain rupee transactions would have to be allowed for operational requirements such as payment of salaries to staff.Similarly, FEMA provisions would have to be amended to remove capital controls in the IFSCs and frame relaxed norms for transactions between IFSCs and rest of India.

Some of these changes, such as changes in tax rates, would have to wait till the annual Budget next year. Besides GIFT, Mumbai would be the second IFSC in India.